Bank of Canada raises overnight rate target to 1 ½ per cent

Thursday, 12 Jul, 2018

Meanwhile, oil prices have risen.

At 2.11 p.m. EDT, the Canadian dollar was trading 0.7 per cent lower at $1.3206 to the greenback, or 75.72 USA cents. The possibility of more trade protectionism is the most important threat to global prospects.

Bank of Canada Governor Stephen Poloz said the rate hike was appropriate since Canada's economy is operating near capacity and inflation is on target. Temporary factors are causing volatility in quarterly growth rates: the Bank projects a pick-up to 2.8 per cent in the second quarter and a moderation to 1.5 per cent in the third.

At the same time, household spending will represent a smaller and smaller share of overall growth due to the dampening effects of higher interest rates and stricter mortgage rules, it said. The economy's growth projection for this year remains at 2%, the bank said.

As in April, the projection incorporates an estimate of the impact of trade uncertainty on Canadian investment and exports.

The bank, however, noted in its report that despite "healthy" labour market conditions, employment growth and average hours worked have slowed down compared to last year's surge. This effect is now judged to be larger, given mounting trade tensions.

The Bank of Canada may have widely telegraphed its desire to raise interest rates, but whether Canada needs to raise rates in step with the U.S.is much less clear, said David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates. However, Rosenberg said Canadian inflation data has been skewed by high gasoline prices, the prior impact of a weak Canadian dollar and recent minimum wage increases in provinces like Ontario and Alberta. Although there will be hard adjustments for some industries and their workers, the effect of these measures on Canadian growth and inflation is expected to be modest. At the rate decision, BoC officials said they expect "higher interest rates will be warranted to keep inflation near target", offering some insight on the stance of the bank heading into future rate decisions.